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The United States: on its way towards historic (and potentially disruptive) reform of corporate taxation

The Republicans in the House of Representatives are proposing to completely overhaul the corporate income tax regime. The proposed reform, which would be a milestone in history, is not without danger.

On the eve of Donald Trump’s inauguration, examining the most controversial measure - the introduction of a plan to adjust taxes at the border (border tax proposal) - is necessary. It involves introducing a form of VAT in the United States on traded goods but not on wages. The economic and financial consequences of such a measure go well beyond the confines of US taxation alone.

In theory, this type of measure is neutral for trade, because it is supposed to trigger an appreciation of the dollar, which would neutralise the initial trade advantage (generated by taxing imports and subsidising exports). However, the fact that wages would be deductible changes the situation completely from a legal standpoint and goes against WTO regulations, which could potentially open the door to retaliation from trading partners.

Whatever happens, this type of measure is likely to be a source of confusion. In light of the uncertainty over its impacts (on the US economy, emerging markets and the dollar), investors’ jitters would be very much apparent, at least initially.

CROSS ASSET (Download)

The United States: corporate tax that is substantially higherthan in the rest of the world

With an average corporate income tax rate of 38.9% (federal tax rate of 35% + state income tax), the United States has one of the highest corporate income tax rates in the OECD and the 3rd highest worldwide. The average corporate income tax rate in 188 countries is 22.5%, or 29.5% if the rate in each country is weighted by its economic power (GDP weight):

The G7 countries have an average corporate tax rate of 30.2% (33.75% if the GDP weighting is applied);

The average of the 33 other countries of the OECD is 24.8% (28.3% if the GDP weighting is applied);

The BRICS (Brazil, Russia, India, China and South Africa) have an average corporate tax rate of 28.3% (27.4% if the GDP weighting is applied).

Over the past 10 years, the difference in tax burden between the United States and the rest of the world has sharply increased. The global average has fallen from 34.1% to 29.5% while US corporate tax rate has remained unchanged. Asia is where the reduction in tax has been the most dramatic (with the average rate falling from 31% in 2003 to 20% in 2016).

However, in practice, US businesses benefit from exemptions and deductions that significantly reduce their effective tax rate. In particular, companies that relocate do not pay taxes as long as income is not repatriated to the United States. The effective tax rate for US companies does not exceed 27%, i.e. a level lower than the average effective tax rate of the OECD countries (27.7%).

This is what the proposed reform seeks to remedy by proposing a tax rate lower than the average tax rate of the OECD countries, while limiting the impact on the US Treasury’s revenue thanks to the broadening of the tax base.

BOROWSKI Didier , Head of Macroeconomic Research

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The United States: on its way towards historic (and potentially disruptive) reform of corporate taxation